Copper demand would fall by 1.4 million tons this year, and consumption recovery could take up to four years due to the pandemic

While China is picking up somewhat on its demand for the red metal, the global contraction will push consumption down 4% this year. These perspectives will make the price of the commodity be around US $ 2.4 a pound, on average, until 2021.

The past few days have not been easy for the mining industry. The increase in infections and deaths recorded in the last two weeks in different companies – and that union organizations now number nine – have increased pressure on the effectiveness of the control measures that companies are applying.

In addition, it has led some sectors to consider the possibility of suspending extractive operations as a way to control the spread of the disease within operations and in the cities where they are located. At a time when mining production has managed to overcome the impact of the pandemic and has remained firm during the first half, helping to contain the collapse of the country’s economic activity, the idea of ​​paralyzing operations is resisted not only by The companies themselves, as the CEO of Codelco, Octavio Araneda, a couple of days ago in an interview with “El Mercurio” said that putting additional restrictions on this sector would have a “catastrophic” effect on the economy.

Even the president of the Central Bank, Mario Marcel, echoed the concern and asked the industry to redouble its efforts to avoid, precisely, the adoption of stricter measures. All to avoid repeating in Chile situations such as Peru, where the economy fell by 40% as a result of strict quarantines and the stoppage of mines that have a significant weight in the production of that country, due to the high number of infections in its endowments.

Industry leaders and executives, such as Codelco’s own helmsman, have anticipated that the months of July and August will be the most complex for mining, a vision shared by analysts. The depletion of the endowments that have operated in contingency schemes for the last almost four months, the increasingly critical stance of the unions regarding the protocols adopted by the companies and the pressure on the authorities to extreme the restrictions could tarnish during the second semester the good results of the first part of the exercise.

In fact, this more complex scenario for mining in Chile and in other copper-producing countries has analysts reviewing their projections regarding the impact of the pandemic on the supply of red metal. The same occurs in relation to the estimates of the recovery in consumption, in light of the global deterioration of the economy. “In these weeks, with the worsening of the pandemic in Chile and the increase in the number of infected mining workers, the effects are likely to increase significantly, as social distancing and controls must become much more rigorous.

In addition, there is the risk that an important task must suspend activities if it fails to control an outbreak of covid-19, as was the case with Antamina in Peru, or Cobre Panamá, in Panama. Codelco suspended the Chuquicamata smelter and partially the refinery in this same division, the first example in Chile of this type of measure. Although the latter does not affect production, it shows that the increase in cases among workers in a mining operation can lead companies to take more drastic measures, and this has a greater effect on supply, “explains Erik Heimlich, principal analyst at CRU Group’s Santiago office.

At the beginning of June and in the framework of a webinar that the National Mining Society (Sonami) organized for its partners, this English commodity analysis firm projected for this year a contraction of about 700 thousand tons in the world supply of copper from mine. And now, less than a month later, that calculation rises to over a million tons, compared to the projection they were handling last January, in a pre-covid-19 scenario.

Until now, the effective loss of production is around 500 thousand tons. A first factor that underpins the consultancy’s projection is the production cuts adopted by companies such as Freeport McMoRan —in Chile and the United States— in response to the unfavorable price scenario that copper had been dragging on since last year. The second element is the disruptions associated with the work stoppage in countries such as Peru, Panama and Indonesia, due to the high number of infections among its workers. Thirdly, they mention the lower productivity associated with the sanitary control measures implemented.

CRU Group’s estimate for Chile – which produces a third of the world’s copper – is that this year production could be below 5.7 million tons of mine copper, a figure that is already less than almost 5, 8 million tons in 2019. He warns that in the event that large mining operations manage to overcome the pandemic without total production suspensions, unlike what did happen with Cobre Panamá or Antamina, in Peru.

Heimlich adds that some mining companies have managed to operate reasonably with extended shift systems and downsizing, at least temporarily. Others have resorted to exploiting higher grade minerals to maintain production in this period. But, he adds, “that is not sustainable indefinitely and some production losses could appear later,” says the analyst.

The executive director of local consultancy Plusmining, Juan Carlos Guajardo, agrees with this vision. In his opinion, the contingency measures adopted by mining companies in Chile are likely to have an effect in the medium term. “Our current estimates point to a fall in production for 2020 of between 187 thousand (-3.2%) and 320 thousand (-5.5%) tons of copper, which will depend on how the continuity policy continues to be applied operational and its effectiveness ”, says Guajardo.

The professional adds that these ranges correspond to a conservative estimate, since they do not consider cases of partial or total arrests at work due to massive infections. “A different situation would be if there are stoppages,” he says. These Plusmining projections add an additional element, which points out that the lowest production could be extended to 2021 in approximately 120 thousand tons of fine copper, which would be at risk next year. Globally, they expect production to fall between 870 thousand and 1.5 million tons. This year world consumption will fall by 1.4 million tons.

If on the supply side of copper the projections are not favorable, the situation regarding demand is not much better. In Plusmining they estimate that despite the rapid recovery observed in China, the lag that the western world will have in its return to normal production levels would drop demand by around 6.5% compared to pre-covid-19 estimates. In terms of volume, the CRU Group proposes that this year world consumption will fall by 1.4 million tons, of which some 800 thousand tons correspond to a structural impact, since it would be a demand that could only recover by 2024.

The consultant states that in the case of Chinese demand, they revised their projections. If in June they estimated a 2% contraction in the demand of that market, now they project a slight improvement, to place a flat demand with respect to 2019. Combined this with a contraction close to 8% in the rest of the world, “we are seeing a decrease in global demand of around 4%, a relatively modest drop given the magnitude of the covid-19 pandemic and its impact on world economic activity, “says Heimlich, who points out that although they maintain the volume of lower consumption than They projected in early June, the difference is that they now see China better, quickly recovering lost inventories, and the rest of the world – basically Europe and the United States – with a production activity linked to copper worse than in their previous estimate.

The vision that CRU Group gave to Sonami’s partners is that the net between the reductions in supply and demand for copper will be a surplus of some 400 thousand tons of copper, an imbalance that although they hope will decrease in the coming years, would persist at less towards 2024, which will impact metal prices, placing it below the levels seen in recent weeks or the US $ 2.74 that it carries as an average this month.

“We see that the price for this year and next will be around an average of US $ 2.40 per pound. Thereafter, we see an upward trend to reach US $ 3 per pound by 2024. This, however, represents a level below our previous long-term price expectation. They are going to be complex years for the industry in terms of price and even when costs have decreased due to the issue of fuel and the exchange rate, it will still put pressure on it, especially for medium-sized mining, ”he explained to the partners from Sonami Juan Esteban Fuentes, local head of CRU Group.

Source: El Mercurio

Translated with Google Translator